Chicago Vacancy Skyrockets as New Space Floods Market

As employers trim thousands of jobs in Chicago, the office vacancy rate is expected to soar to nearly 20% later this year, according to real estate investment services firm Marcus & Millichap.

Chicago companies are expected to eliminate 68,000 jobs this year, reducing payrolls by 1.5% on top of the 59,000 jobs cut last year, according to Walnut Creek, Calif.-based Marcus & Millichap’s newly released 2009 National Office Research Report.

Financial companies are particularly hard-hit by the recession and job losses, as employers in that sector are slicing an estimated 26,000 positions from their payrolls, a 2.6% decline.

A record amount of new space is expected to flood the city’s market this year, says John Abuja, vice president of investments at Marcus & Millichap in Chicago. “This is the largest annual delivery in more than a decade in the city. Close to 75% of the space is pre-leased. Still as a result of all this new space, rents are forecast to recede.”

An upside of the new space is that it will benefit investors, Abuja says. “You are potentially allowing investors to acquire the downtown office assets at prices that are well below what were peak valuations going back a couple of years ago.”

As offices empty out, approximately 4.7 million sq. ft. of space is forecast to hit the market this year, up from 3.1 million sq. ft. in 2008, according to the new report. The vacancy rate is projected to climb 380 basis points to 19.9% this year, on top of a 70-basis point increase last year.

Meanwhile, rents are dropping. Asking and effective rents are expected to fall to $26.20 per sq. ft. and $20.97 per sq. ft., declines of 4.1% and 6.6%, respectively.

A number of companies are taking advantage of the newly available space, says Abuja. “We’re seeing Class-C tenants move into the Class-B buildings for the same rent they were paying and a lot of the Class-B tenants are moving into the Class-A buildings for similar rents.”

In addition, several large firms have moved into the city from the suburbs. “Many large firms are trying to attract young professionals who want to live in the city. They want to live downtown or in Lincoln Park, so there has been a pull for a lot of these large firms to move their office space into the city.”

“Developers are slowing the rate of deliveries in the suburbs in 2009, but much of the speculative construction of recent years remains unoccupied, and reduced tenant demand will further raise vacancy,” adds John Przybyla, regional manager of the downtown Chicago office of Marcus & Millichap in a statement.

“In the suburban submarkets, weakened demand from housing-related tenants will weigh on fundamentals in 2009; however, close in cities will likely fare better than outlying areas,” says Przybyla.

In downtown Chicago, fundamentals began to soften late in the fourth quarter of last year, Marcus & Millichap reports.

A number of cities have fared better than Chicago as the recession progresses. Washington, D.C., for instance, has benefited from government expansion at a time when private firms are cutting back their employee rosters. According to New York-based research firm Reis, the capital’s office vacancy rate rose to 8.3% in the fourth quarter, up from 7.4% in the same period a year earlier. Washington’s vacancy rate, at the highest level since 1997, according to Reis, still remains far below Chicago levels.

In Broward County, Fla., which was one of the nation’s healthiest job markets during previous expansions, employment is expected to contract by 4.2% this year, with a loss of 32,000 jobs, an increase from 26,900 positions lost last year, Marcus & Millichap notes in a separate report.

The office inventory is projected to increase by 343,000 sq. ft. this year, compared with deliveries of 504,000 sq. ft. in 2008. And while the rising vacancy rate is expected to reach 17.2% this year, a jump of 360 basis points, compared with an increase of 260 basis points last year, it is still not as steep as Chicago’s projected increase.